Read below the sorry situation “Caroline” finds herself in.
The tax attorney Max Reed suggests three options: 1) Obtain a CLN; 2) Do nothing; OR 3) Catch up on U.S. tax returns and renounce (i.e., NOT relinquish) citizenship. How do you suggest a tax attorney should advise Caroline?
Tax attorney Max Reed opines and three attorneys (John Richardson, Virginia La Torre Jeker, Michael Miller), PLUS Shovel AND USCitizenAbroad comment on whether a foreign (U.S.) “tax-citizenship” law that might or might not impact on Canadian Caroline is retroactive.
The case of “Caroline”:
In advisor.ca there is an article by Max Reed with commentaries about whether a foreign U.S. (At present, the U.S. is considered by the United Nations to be a country foreign to Canada) tax-citizenship law should be applied retroactively to a Canadian. Read the entire article and commentary on an issue that has often been discussed on Brock.
Max Reed cites the example of a “Caroline”, a Canadian who relinquished U.S. citizenship in 1978 and has no CLN (Certificate of Loss of Nationality). Her bank sends her a FATCA letter and says that it will report her to the IRS unless she comes up with a CLN.
“In September 2016, she goes to the U.S. State Department to get a CLN to document her loss of U.S. citizenship in 1978 [good idea?]. But what is the exact date of Caroline’s loss of U.S. citizenship for both U.S. tax and immigration purposes?”
Max Reed provides a “common sense” view in the article and also, below, what he feels is a “literal reading” of a 2008 U.S. law:
“The literal approach is based on a strict reading of the law. Since 2008, U.S. tax law has set the date that a person loses U.S. citizenship as the earlier of the date that he applies for a CLN at the Department of State or the date the CLN is issued… Under the literal approach, because Caroline never obtained a CLN, she remains a U.S. citizen until her State Department visit in September 2016. This means she would have had tax obligations to the U.S. government for the previous 38 years – despite losing her citizenship for immigration purposes in 1978…”
Virginia La Torre Jeker comments:
“The collective view of several distinguished US tax professionals is that the current version of the expatriation provisions as spelled out in Internal Revenue Code Sections 877A and 7701(a)(50) as enacted by the HEART Act must have prospective application only… If a later Congress had intended the “surprising result” of retroactivity when passing the 2008 expatriation laws, it would no doubt have spelt this out very clearly….
John Richardson:
“1. What you describe as the “literal” approach is based on reading the exact words of Internal Revenue Coce S. 877A. S. 877A(g)(4)in its opening language addresses those who are “citizens”. Not past citizens. It reads: “A citizen shall be treated as relinquishing his United States citizenship on the earliest of—”
What it means to be a U.S. “citizen” is not defined in the Internal Revenue Code. It is defined only in the Immigration and Nationality Act. Internal Revenue Code S. 877A came into force in June of 2008. Therefore, it seems reasonable to assume that if one was not a U.S. “citizen” under the Immigration and Nationality Act in June of 2008, then S. 877A(g)(4) should not apply to that person. To put it another way: the “literal approach” would/should lead to the conclusion that Caroline, who became a Canadian citizen in 1978, was not a U.S. “citizen” for tax purposes in June 2008.
2. Prior to 2004 there was no provision in the Internal Revenue Code that allowed for one to be a “tax citizen”, if one had relinquished U.S. citizenship under the nationality laws. In other words, if NOT a citizen under the nationality laws then NOT a taxpayer. This means that those who relinquished U.S. citizenship prior to 2004 under the nationality laws, were not subject to taxation under the Internal Revenue Code. The 2004 law (that created the “tax citizen”) specifically stated that the creation of the “tax citizen” under the Internal Revenue Code was prospective only. It seems unlikely that the enactment of S. 877A in 2008 would have changed what was clearly a prospective concept to a retroactive application.
Therefore, whether one takes the “literal approach” or the “common sense” approach, the notion that Caroline, who relinquished U.S. citizenship in 1978, owes U.S. taxes, is hard to justify under the law.”
Michael Miller:
“…But, just to provide a taste, it’s interesting to note that even the so-called common sense approach is very easy to square with a literal reading of the statute.
If you start with the proposition that, prior to 2004, anyone who relinquished citizenship for nationality purposes also ceased to be a citizen for tax purposes, and add in that the 2004 legislation expressly grandfathered those persons, then you have to start your consideration of the 2008 legislation (including, in particular, IRC section 7701(a)(50), with the understanding that Caroline had ceased being a citizen for tax purposes in 1978.
With this in mind, the question is what do we make of IRC section 7701(a)(50) which says, in pertinent part, that “An individual shall not cease to be treated as a United States citizen before the date on which the individual’s citizenship is treated as relinquished under section 877A(g)(4)” Well, Caroline didn’t need to cease to be treated as a citizen at any time when this statute was on the books, because she ceased to be a citizen in 1978. Therefore the common sense approach dovetails with the language of the statute once it’s understand that, by saying what’s needed for an individual to cease being a citizen for tax purposes, the statute should have no impact on someone — like Caroline — who has already ceased being a US citizen.
And, above and beyond that, it’s important to understand what the contrary interpretation would mean. Since Carolyn had long since ceased being a citizen for nationality and tax purposes when IRC sec. 7701(a)(50) was enacted, the so-called literal approach would have to affirmatively restore citizenship that had previously terminated in order for this provision to apply — which is clearly absurd. Therefore, since marketing is everything, I would choose to characterize the competing interpretations as the absurd one and the non-absurd one.”
— Shovel notes:
“Anyone who relinquished before 2004 and is thinking of filing U.S. taxes (or is being told to file as part of a current tax citizenship expatriation) needs to read these instructions from the IRS carefully.
“2015 Instructions for U.S. Form 8854″
“Initial and Annual Expatriation Statement”“Purpose of Form”
“Form 8854 is used by individuals who have expatriated on or after June 4, 2004.”
https://www.irs.gov/pub/irs-pdf/i8854.pdfThe IRS itself here plainly says that if you expatriated before June 4, 2004, Form 8854 is not for you. Throw it in the garbage. Do not read on and get yourself entangled in the mumbo-jumbo rules that apply only to those who expatriated on or after that date.
But they’re only to happy to take you and your money if you don’t know how to read.”
USCitizenAbroad:
“The question asked by Stephen Kish is how should Caroline be advised. Mr. Reed proposes two interpretations of S. 877A which he calls the “literal approach” and the “common sense” approach. One problem of reading articles written by the tax compliance community is, that by focusing on the theoretical, they minimize the “real life” consequences to the people they advise. So, what are the “real life consequences?” The “literal approach” results in the destruction of your life. The common sense approach means that you still have a life. (Which do you think is the better approach?)
Here is why.
Rather than frame the issue as “the literal approach” vs. the “common sense approach”, the issue should be framed as:
Approach 1 – Your Life Is Over: Under this “literal” interpretation of S. 877A, you poor dumb former American will have to turn your life savings over to the IRS (and pay the adviser to help you do this) because you did not go out and obtain a CLN. It doesn’t matter that a CLN was not required by law. It doesn’t matter that you didn’t know what one was. It doesn’t matter that the U.S. Government was threatening you with the loss of your U.S.citizenship if you became Canadian. It doesn’t matter that in some cases the U.S. was denying entry to the USA to those who had become Canadians. What matters is ONLY that this is what the statute says NOW!!!!!!! So, you better step right up and turn your life savings over to the IRS.
Approach 2 – It’s Your LIfe! Why don’t you keep it!: Let some “common sense” prevail. You were one of the smart ones. Because you relinquished U.S. citizenship – according to the clear laws of the USA in the 1970s – you are not affected by this new law. The only people affected by this new law are the “dumb bunnies” who decided it was a good idea to be a U.S. citizen AND were U.S. citizens when this law took effect on June 16, 2008. I don’t think you should draw attention to yourself. You might want to document the circumstances that led to your becoming a Canadian citizen in 1978. When documenting those circumstances, you probably should make it clear that you were intending to relinquish U.S. citizenship. But, either way you have to sleep. So, you might as well – Sleep well!. There is no good reason to turn your assets over to the IRS and pay your adviser to help you do it.A fair reading of the legal commentary on this issue appears to be:
One group of lawyers (including the three who commented on this article) do NOT believe that the “literal” (or as Michael Miller says, the “absurd”) approach is correct.
A second group of lawyers thinks that the “literal” approach MIGHT be correct. But, they aren’t really sure. Even though they are not sure, for reasons known only to them, they usher clients into turning their assets over to the IRS. Hmmmm, …
Given the existing commentary and lack of certainty (on the part of those who recognize the “literal approach”), what I can’t understand is:
1. How any adviser could possibly advise a client that the “literal” approach is correct (turn your assets over to the IRS). Yet, we know that a very large number of people are being advised to do just that. (Note that, since June 16, 2008 a CLN is most certainly required lose U.S. tax subjectness. But NOT before.)
2. How any client, given the existence of conflicting views, could possibly allow themselves to be guided into accepting that they should turn their assets over to the IRS. (Actually I know the answer. It’s because there is ONLY one certainty in life. If you turn over all your assets to the IRS, then you will never have tax problems again. But, you won’t have a life either and then you will have a different set of tax problems.)
This reality notwithstanding:
There is/are a large number of people who clearly relinquished U.S. citizenship many years before the current laws, who have allowed themselves to be guided into the “literal appraoch” – turning their assets over to the IRS.
Conclusion: The result that you get will be determined by your choice of adviser. Think about it!”
Do nothing, let the IRS try to figure it out!
I would advise “Caroline” to count her blessings that she is not living in a totalitarian country anymore and hasn’t for 38 years. I would advise “Caroline” to not worry too much about dealing with the extortionist mafia racket in the United States. She should maintain her position that she renounced her unwanted citizenship 38 years ago and is currently in possession of a CLN. Let them come after her, wherever she is. There is only so much that any sane and just person should put up with when dealing with a corrupt and extortionist system. Enjoy your life “Caroline” and don’t lose sleep over unfixed FBAR and tax forms during 38 years when you were not a citizen of the “freedom loving country”. On that subject, readers may find it interesting to read this recent ranking of the freest nations in the world. Look who comes in at No. 1…
http://www.mcclatchydc.com/news/nation-world/world/article105618381.html
Treat it like you would the scam calls you get on your cell phone, like the one I received this morning, that said:
Both are about as evil! The use of FEAR to intimidate.
But the question is how should Caroline handle the *request* / demand from her *local foreign financial institution*.
I don’t know says Carol (on behalf of my son — who, Max, the US says cannot renounce due to lack of requisite mental capacity) so I would start by doing nothing. I have renounced and have my CLN, having chosen to go through all the compliance hoops. Knowing what I know now, would I do the same again?
“Read the entire article and commentary on an issue that has often been discussed on Brock.”
I tried. I reached this point:
‘The tax and immigration consequences of relinquishment are complex, so professional advice is a must.’
Do I still have to read the entire article?
“Caroline decided to obtain a CLN from U.S. DOS in 2016.”
That seems like a reasonable thing to do. Too bad about the fee, though I think the fee can be avoided. The CLN should show the date of loss of nationality, 1978 when she relinquished, even though the certificate is issued after the loss occured.
I still think she can avoid the fee by applying for a US passport, declaring that she relinquished US nationality in 1978 by performing the stated actions with intention to lose US nationality, and has not acted as a US national since then. On seeing that declaration, the consular officer has to prepare a CLN.
If the US thinks Section 877A is retroactive, the IRS has to give Caroline the 1978 edition of Form 8854.
I don’t know what I would have told her because my jaw would still be on the ground. Such bullshit!
The correct answer is ‘none of the above’. She obviously shouldn’t file tax returns. We all agree on that. She shouldn’t get a CLN. That takes a year and costs $3000.
Rather than do nothing she should have it out with her FI. When she relinquished in 1978 there was no requirement to inform the State dep’t or to obtain a CLN.
for perspective from professionals in the industry:
http://isaacbrocksociety.ca/2015/05/08/26-u-s-code-%C2%A7877a-the-exit-tax-rules-do-you-see-them-as-applying-prospectively-or-retrospectively-or-both/
My guess is that the DATE on the CLN is important.
What a joke with retroactive laws. But just look at the law civil forfeiture. So many many BAD laws.
A nation gone nutz. Every interpretation of the law ( see Bopp`s case) has been twisted out of proportion.
And Michael Miller has also weighed in:
I find it SO REFRESHING to hear voices of reason on this topic!
@PatriciaMoon
I have heard so many many voices ( LOLOLOLOL)
But which ones carry weight?
Anyone who relinquished before 2004 and is thinking of filing U.S. taxes (or is being told to file as part of a current tax citizenship expatriation) needs to read these instructions from the IRS carefully.
“2015 Instructions for U.S. Form 8854”
“Initial and Annual Expatriation Statement”
“Purpose of Form”
“Form 8854 is used by individuals who have expatriated on or after June 4, 2004.”
https://www.irs.gov/pub/irs-pdf/i8854.pdf
The IRS itself here plainly says that if you expatriated before June 4, 2004, Form 8854 is not for you. Throw it in the garbage. Do not read on and get yourself entangled in the mumbo-jumbo rules that apply only to those who expatriated on or after that date.
But they’re only to happy to take you and your money if you don’t know how to read.
@ Stephen Kish
I’m not a lawyer.
But I have advised and directly helped two people who naturalized to Canada in 1972 to get their CLNs. (This was when relinquishment was still free.)
Since then, there’ve been no issues for either of them, neither with their banks, nor with the U.S./IRS.
The answer/path is dependent on what “Caroline” plans on doing in the future.
Lets use the USA as an example and the year 1960 with a US Citizen that was born in Poland. Such a person visiting Poland in 1960 would have had “difficulties.” The US Government if asked would advise said person that they are SOLEY a US Citizen in the eyes of the United States. Further advice would come along the lines ignore any demands from the Polish Government with the caveat and warning of traveler beware of you step foot in Poland.
“Caroline” under US Law is not a US Citizen, period and end of story.
The question is if she wishes to have any sort of relationship with her “ex.”
If she desires to have some kind of “relationship” with her “ex” then she will need to follow some of the demands.
“Zen and the Art of Citizenship” tells me that citizenship is like marriage. You either stay in that relationship or you seek divorce with the divorce proceedings affecting the relationship. Just as in marriage “Caroline” applied for the “divorce” in Canada, the ex now insists that the “divorce” be done in Amerika or he might not recognize it.
George would recommend to enjoy life and forget the whole affair. Maybe spend the $2,350 on an all inclusive trip to Havana where the sun is warm and the people are friendly.
As I understand it, this is the current reality:
1) I believe the IRS (very senior personnel) says, verbally, it will not pursue those who relinquished long ago (pe-2004).
2) However, the IRS will not give any assurances to #1 above in writing, as they believe that in so doing they would be contradicting the “clear language” of the law. They do not have authority to contradict “clear language”. I believe that is why they have issued no formal guidance on this issue.
So, unfortunately, it seems it is unlikely there will be any written certitude for those that relinquished long ago.
Getting a CLN confirming pre-2004 relinquishment is, in my opinion, a very good idea. That bit of paper confirms that you have relinquished. Without it, I suggest a person has little or no way of proving they have in fact relinquished, which could be very unfortunate if the IRS does come calling.
let the irs come calling for me then. i am doing nothing to assist uncle sam in the round up of his slaves.
i left the plantation a long long time ago and the government of Canada in 1980 saw fit to bestow citizenship on me.
i feel way safer not doing anything at this point in time rather than walking into my nearest consulate with a free date to sign a bunch of papers and have the privilage of paying $2,350 to prove something that i did 36 years ago actually did happen.
screw that….i will take the $2,350 and have a nice holiday like george suggested…..i would council “caroline” to do the same.
p.s. my bird cage could use some more paper at the bottom of it uncle sam…….
Caroline is only in this situation because of Fatca and the witch hunt. Before Fatca, she could go about her every day business normally and in peace and everyone left her in peace.
It is absurd to say that suddenly she is a citizen again if she relinquished in 1978. There was no need of a CLN back then. She followed the terms and conditions of that period. I would tell her to do nothing. The banks just want a reasonable explanation and her explanation sounds pretty reasonable to me.
The term “document oneself” makes me sick. Whoever heard that in a free society one has to document oneself against their place of birth.
Perhaps sue the Sec of State in US Federal Court to resolve this question? However there is a side of me that says why should anyone have to go through the expense and hassle to start with?
“Perhaps sue the Sec of State in US Federal Court to resolve this question?”
To sue for what? If the CLN shows that relinquishment took places in 1978, State did their job.
If Caroline had applied for a passport in 2016 and written a declaration of her 1978 relinquishment but not received a CLN, a lawsuit would be meaningful.
“However there is a side of me that says why should anyone have to go through the expense and hassle to start with?”
Should, because the US’s diaspora are all members of the richest 1%, and all are members of the fraction of that 1% who are tax evading traitors. All 100% of them are in the 1%.
@ Norman Diamond
Oh yes, I’m definitely a 1 percenter. Only yesterday I had my people call the captain of my yacht to tell him to prepare it for a 2 week Mediterranean cruise. My Lear jet will arrive in Monaco on the 17th. Naturally I will NOT be flying over US airspace. 😉
@UKRose, re;
“..The term “document oneself” makes me sick. Whoever heard that in a free society one has to document oneself against their place of birth.”
Yes. And even with a CLN in hand, and having relinquished, those of us with a US birthplace, having even jumped through the flaming hoops of extraterritorial US compliance – and even having severed the last vestigial official tie in the manner demanded by the naked Emperor and his minions, are in the position of potentially having to prove we are NOT something, despite being citizens and residents of a non-US sovereign and autonomous nation. Having to explain one’s birthplace away.
That is sick. And that is why the ADCS lawsuit must succeed. I am not free and equal until my chosen home country treats me solely like a Canadian, and not like a suspect person with US ‘indicia’ – guilty by association.
Your papers, please!
In Canada, Caroline need only provide her bank with a reasonable explanation as to why an unreasonable law should not apply to her. I’d like to see it become the bank’s problem when they send people to seek advice from tax and not immigration lawyers.
I’d like to see it become the bank’s problem if and when they send a Canadian citizen’s personal financial data off to a foreign country. This whole thing started off with an entirely imaginary problem (millions of rich expats evading US taxes by moving overseas). Congress then made it a real problem for all foreign banks (by passing FATCA). Those banks then made it their respective government’s problem (by demanding the signing of the IGAs). Now some of those banks are trying to make it our problem by demanding CLNs.
I don’t have a CLN and have absolutely no intention of paying the extortionate cost (of both time and money) to get one. None of my banks have yet made it an issue (perhaps because I have no problem lying to them about my former USness). If and when a bank does ask me for a CLN I will give them my “reasonable explanation” and if that doesn’t do the trick and they send off my data anyway I will scream bloody murder to whichever MP/government is in power at the time. Nobody’s data should be sent anywhere until the ADCS lawsuit is settled.
Worst case scenario: my bank does send off some data and I eventually receive an IRS letter which I immediately throw in the garbage. At that point everyone (Congress, the IRS, the Canadian government, my bank, the CRA) will have wasted their time and money. Except me.
F-off US government; if you want to tax someone, go tax Donald Trump.
@ maz57
I love your attitude. I guarantee you will not be alone because your 3 step plan sounds quite reasonable to me:
1) DENY a US connection at the bank.
2) DEFY any IRS demand … IF it happens.
3) DECRY US overreach into Canadian lives.